July 5, 2007 Executive Summary Strategyresearch.cibcwm.com/economic_public/download/psnov07.pdf2...

Executive Summaryby Jeff Rubin

“... text text text”

July 5, 2007

Canadian Portfolio Strategy outlook

Strategy

Jeffrey RubinEconomics & Strategy

(416) [email protected]

Peter BuchananEconomics & Strategy


Avery ShenfeldEconomics & Strategy


Quentin BroadCanadian Equity Research


Yin LuoQuantitative Strategy


CIBC World Markets Inc. • PO Box 500, 161 Bay Street, BCE Place, Toronto, Canada M5J 2S8 • Bloomberg @ WGEC1 • (416) 594-7000C I B C W o r l d M a r k e t s C o r p • 3 0 0 M a d i s o n A v e n u e , N e w Yo r k , N Y 1 0 0 1 7 • ( 2 1 2 ) 8 5 6 - 4 0 0 0 , ( 8 0 0 ) 9 9 9 - 6 7 2 6

http://research.cibcwm.com/res/Eco/EcoResearch.html

Strategy's Recommended Asset Mix & TSX GICS Sector Weights

vs. Current Benchmark

November 8, 2007

“With global growth as firm as ever, and crude prices on the threshold of US$100 per barrel, we remain confident that the TSX will post new record highs next year ...”

While there is no shortage of volatility these days, slowly but surely the TSX is pulling itself out of the summer correction. The TSX is much more a play on the global economy than the North American economy, with its huge weightings in energy and materials, our two largest overweights. Those two growth poles should more than offset the drag from the current spillover effects from the US subprime mortgage market on Canadian bank stocks. With global growth as firm as ever, and crude prices on the threshold of US$100 per barrel, we remain confident that the TSX will post new record highs next year, ending 2008 at over 16,000 and warranting our current 12-percentage-point overweight in equities.

With big tax cuts now headed Canada’s way, the chances of any monetary easing by the Bank of Canada to cool the loonie are effectively nil. We are raising our short-term Canadian dollar forecast to a new record high US$1.11 by year-end but are sticking with our “nickel back” outlook for most of 2008. While we expect another 25-bp cut from the Federal Reserve Board, bond markets will soon have to contend with some of the hottest US inflation numbers in years, thanks to soaring energy and food prices. We remain 9-percentage-points underweight bonds and 3-percentage-points underweight cash.

Another Fed rate cut will see further declines in the value of the greenback against both gold and the Canadian dollar, requiring some realignment in our equity portfolio. With gold prices already

near US$840, we are raising our bullion target for next year to US$900 and adding a half percentage point of weighting to our already overweight position in gold stocks. At the same time, the prospect of an even stronger Canadian dollar has prompted another half-percentage-point cut to our position in industrial stocks, which are highly exposed to the currency. While we are maintaining our overall weighting in financial stocks, we are shifting a percentage-point of weighting from banks to non-bank financials which represent a better bet against further writedowns associated with the still-imploding US subprime mortgage market.

ASSET MIX (%)Bench-mark

StrategyRecom-mend.

vsBench-mark

chg vs

mon. ago*

Stocks 56 68 +12.0 0.0Bonds 38 29 -9.0 0.0Cash 6 3 -3.0 0.0GICS SECTORS (%)**Cons. Discretionary 5.0 3.5 -1.5 0.0Cons. Staples 2.6 1.6 -1.0 0.0Energy 26.9 30.9 +4.0 0.0Financials 29.8 30.3 +0.5 0.0 -Banks 16.7 15.7 -1.0 -1.0 -Insur., REITs, oth. 13.1 14.6 +1.5 +1.0Health Care 0.6 0.6 0.0 0.0Industrials 5.3 3.3 -2.0 -0.5Info Tech 4.9 2.9 -2.0 0.0Materials 18.0 21.0 +3.0 +0.5 -Gold 6.6 8.1 +1.5 +0.5 -Other Metals 7.8 9.3 +1.5 0.0Telecom 5.5 4.5 -1.0 0.0Utilities 1.5 1.5 0.0 0.0

Note: Shading indicates recommended overweight.*chg in %-pt underweight/overweight from last month.

** Benchmark weights are for TSX Composite.

2

CIBC World Markets InC. Canadian Portfolio Strategy Outlook—November 8, 2007

strategyPlaying the Global Card—Jeff Rubin, Peter Buchanan and Avery Shenfeld

Table 2 - Economic Forecast

Table 1 - Equity Projections

Despite compelling evidence of US housing weakness, North American equity markets gained ground in October, another sign markets have already factored in a large, perhaps even excessive, cushion against more bad news from that troubled sector. While the housing recession has a ways to go, investors can draw some comfort from the fact that further bad news on that front is, by and large, already built into valuations. Credit derivative market prices are betting that 35% of the existing crop of subprime mortgages will end in default, double the current, but still climbing, delinquency rate.

Last month’s rebound in the TSX was aided by record oil prices and a turnaround in uranium stocks (Chart 1). The energy sector gained ground even with Alberta’s royalty moves while at the other extreme, bank stocks were a laggard on a spillover from south of the border, where a number of US banks reported massive writedowns of securities tied to the imploding subprime mortgage market.

Our TSX target for the end of 2008 remains unchanged at 16,200 this month despite another month of above-average volatility. While volatility emanating from the financial aftershocks of the US housing market will be with us for some time, we expect to see strong market leadership from the energy and materials sectors which together now comprise almost half of the TSX‘s total market capitalization. As such, the TSX remains much more a play on global growth than it does on US economic growth. We remain 12 percentage points overweight equities in expectation of a fifth consecutive year of double-digit returns, including the dividend.

2005 2006 2007 2008TSX Composite 14,625 (10/31) 11,272 12,908 15,000 16,200

-% total return 15.6 YTD 24.1 17.3 18.7 10.4

TSX Operating Earnings - index adj 615 722 830 938

- yr/yr % chg 10.0 (07:Q3) 31.2 17.4 15.0 13.0

S&P 500 1,549 (10/31) 1,248 1,418 1,575 1,670

-% total return 10.9 YTD 4.9 15.8 13.2 8.2

Year-end

Latest

07Q2 07Q3 07Q4 08Q1 2007 2008Canada Real GDP Growth (AR) 3.4 2.4 2.0 2.4 2.6 2.7

Real Consumption Growth (AR) 4.9 2.7 3.0 2.9 3.8 3.0CPI - Headline (y/y) 2.2 2.1 2.6 1.7 2.2 2.0 - Core (y/y) ex taxes 2.4 2.2 2.2 1.5 2.3 1.5Unemployment Rate (%) 6.1 6.0 5.9 6.0 6.0 6.0

US Real GDP Growth (AR) 3.8 3.9 0.8 1.2 2.1 2.0Real Consumption Growth (AR) 1.4 3.0 1.5 1.3 2.9 1.8CPI - Headline (y/y) 2.7 2.4 3.4 3.1 2.7 3.0 - Core (y/y) 2.3 2.2 2.0 2.0 2.3 2.2Unemployment Rate (%) 4.5 4.6 4.7 4.7 4.6 4.9

World Real GDP Growth (% chg) - - - - 5.2 4.9

Chart 1 - Oil Breaks New Ground as Uranium Rebounds

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Shift From Industrials to Gold on Weaker US Dollar

Interest rate policy remains a key source of support for equity markets. While the Federal Reserve Board’s recent 75 bps of rate cuts were motivated more by concern over credit markets seizing up than support for the stock market per se, investors on both sides of the border have cheered the news. Another 25-bp cut in Q1 should go a long way in assuaging investor fears (Chart 2) that the recession in the US housing market will spread to the broader economy.

Meanwhile, any hopes for a Bank of Canada ease to bring currency relief to besieged manufacturers flew out the window with Finance Minister Flaherty’s announcement of big tax cuts, including a percentage-point reduction in the GST. The added stimulus to domestic demand will probably see the Canadian dollar surge to as high as US$1.11 by Christmas, before settling back to a 5-cent premium next year (Table 5).

While manufacturing has been badly hurt, the demise of the factory sector has yet to register in any of the broader measures of economic activity like GDP growth, the jobless rate or the trade balance. Nevertheless, we are reducing our exposure to the sector by taking a further 0.5 percentage points from our already underweight position in industrials. Earnings estimates for the sector have already been cut and further cuts can be expected as the loonie reaches new heights. There are other reasons for down-weighting that sector as well. A flood of new entrants from countries as diverse as Japan and Russia threatens to heat up competition in the already intensely competitive market for medium haul aircraft. And declining freight volumes, accentuated by soft growth stateside, create a question mark as to whether the rails can keep up the solid earnings growth of the last few years.

Bonds have rallied in the last two months, and with another 25-bp Fed cut still in the pipeline, may continue to rally in the very near term. While we would normally add weight to our bond position with a further Fed cut still ahead of us, we have chosen not to do so in view of a pending surge in inflation.

Gasoline prices are back to US$3 per gallon and food price inflation will soon be running close to 5%, at least in part due to the policy-mandated diversion of the US corn crop from animal feed and human consumption to ethanol. Soaring energy and food costs will push US headline inflation close to 4% (Chart 3) over the next 12 months (see October StrategEcon—Corn for Ethanol: An Inflation Crop). The juxtaposition of further Fed rate cuts and some of the hottest inflation numbers seen this cycle is a recipe for a steepening yield curve, and hence our underweight position in bonds.

strategy

Chart 2 - Fed Rate Cuts Have Triggered Solid Market Rebound

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April fed funds futures implied yield (%, Right)

Chart 3 - Food Prices Will Lift US CPI

All Items Inflation (Year End)

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strategyTSX Now More Levered to Global Growth

Soaring resource prices and plunging prices for technology are not only profoundly affecting Canada’s terms of trade, but have also dramatically re-sculpted the TSX, increasing the market’s leverage to emerging markets which are still growing handily, while reducing the vulnerability to the currency and a far-from-healthy-looking US economy. Thanks to the dramatically increased importance of both oil and base metals, the resource share of the market has tripled since the start of the decade, rising in importance from just 15% of market cap to nearly 45% today. That gain, reflecting the broad shift of trade from resources to computers, has come largely at the expense of info tech, whose cap share even with the past year’s above-benchmark performance is still far below its past high water mark (Chart 4).

That compositional change in market cap couldn’t come at a more propitious time as the US economy has gone on recession watch while the global economy has seldom been stronger. Outside of the US economy, growth is soaring. Recent estimates from the IMF now point to near-5% growth in real global GDP next year.

The contribution of emerging markets to commodity demand has been even greater than their contribution to global economic growth since their economies are so much more resource-intensive than the largely service-based OECD economies. Emerging markets have become the dominant drivers of global commodity demand, accounting for as much as 80% of growth in world oil consumption in the last five years. And there seems little sign that the housing market weakness in the US economy is having any impact on emerging economies, as evidenced by the recent 11.5% growth rate of China’s

third-quarter GDP. Buoyant asset prices in those markets suggest that investors are betting—in all likelihood correctly—that those markets will not be impacted too greatly by a modest economic downshift stateside.

Table 3 — Valuations & Earnings Growth by Sector

Chart 4 - Changing Places: Resources & Tech in the TSX

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Resources (Materials + Energy) Info Tech

% weight in Composite

4-Qtr Fwd IndexEarnings Level Current Last Decade 2005 2006 2007(f) 2008 (f)

Financials 153.6 2020 13.1 10.9 12.8 18.3 13.4 9.4Energy 226.2 3431 15.2 13.0 54.5 3.7 20.7 16.8Industrials 86.3 1342 15.5 15.6 23.6 6.6 13.4 13.7Telecommunications 66.6 1068 16.0 34.7 2.1 34.7 12.7 14.8Consumer Staples 102.7 1751 17.1 17.0 1.3 -1.9 1.5 2.9Utilities 113.2 2054 18.2 13.9 10.4 15.2 24.3 3.5Health Care 22.3 426 19.1 49.7 -0.7 12.6 -31.3 -9.8Consumer Discretionary 70.4 1409 20.0 18.6 4.5 8.2 7.0 8.7Materials 159.2 3202 20.1 27.5 21.3 93.3 19.4 9.4Info Tech 9.6 402 41.7 32.3 260.9 -52.1 25.2 26.2TSX Composite 910.0 14625 16.1 17.9 31.2 17.4 15.0 13.0

*Forward cash flow **Price to Fwd Cash Flow

Forward PE

Note: Indexes as of October 31st; 4-qtr fwd earnings are proj. 07:Q3 thru 08:Q2

TSX Op. Earnings (% ch)

5


strategy

Maintaining Overweight on Energy

We are maintaining our overweight of the energy sector this month. The unveiling of Alberta’s new royalty framework on October 26th provoked a much milder market response than many had anticipated as the province scaled down earlier recommendations for a $1.9 billion royalty hike to a more modest $1.4 billion hike. Most notably for investors, Alberta rejected calls for a severance tax on oil sands producers. While the moves lift the profitability threshold for new unconventional developments to around US$65 from US$55-60/bbl previously, that is well below our forecast for US$100/bbl WTI crude oil within the next 12 months.

Even with the new royalty rates, Alberta’s share remains modest by international standards (Chart 5), particularly in comparison to the government’s share from the Venezuelan oil sands, ultimately Alberta’s geological competitor. With most of OPEC, Mexico and Russia effectively out of reach for private investment, Canada’s oil sands represent over 50% of the investable crude reserves in the world.

While the royalty threat has proven less extreme than feared, there have been other factors at play that have seen Canadian oil stocks lag well behind soaring WTI crude prices this year. Both the exchange rate and the heavy-light oil spread have hurt stock performance. The appreciation of the Canadian dollar has robbed producers of about 40% of the rise in the US-dollar-denominated world oil prices, while the recent widening in the heavy oil-light oil spread has accounted for most of the remaining underperformance. We expect to see the Lloydminster-West Texas spread gradually narrow as more new planned refinery capacity is able to accommodate the heavier crude grades that are becoming increasingly critical to supply.

Most importantly to our overweight position, we expect that a strong global M&A market for oil and gas assets will soon begin to make a major impact on Canadian oil sands valuations. The takeover premium in global oil and gas deals has averaged nearly 30% (Chart 6) in the last twelve months, nearly double the premium in the supposedly hot internet/computer sector. As Canadian oils sands continue to grow in global strategic importance, investors can expect increased takeover activity in the sector at current, if not greater, premiums than already seen.

Table 4 — Commodity Price Forecast

Chart 5 - Government’s Share of Oil & Gas Sector Take (%)

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USA-Gulf of Mexico

UK

Alberta's New System

Nigeria

Angola

Russia

Kazakhstan

Algeria

Venezuela

Libya

Source: Chevron, Alberta Gov't, CIBC WM

Average

31-Oct 2005 2006 2007 (f) 2008 (f)

Oil (WTI) $/bbl 94.53 57 66 95* 100*

Natural Gas (Henry) $/Mn Btu 7.22 8.89 6.73 6.80 9.00

Gold $/troy oz. 790 444 604 850* 900*

Copper $/lb 3.51 1.67 3.06 3.35 3.75

Aluminum $/lb 1.13 1.23 1.17 1.20 1.10

Nickel $/lb 14.40 6.71 10.98 16.75 14.50

Zinc $/lb 1.27 0.63 1.48 1.45 1.50

Uranium (contract price) $/lb 95 31 50 100* 120*

*Year-end

Commodity Price Forecast

6


strategyLast, but by no means least, natural gas prices seem to have finally emerged from their five-month slump and are now well on the way to meeting our US$9/Mn Btu target. While gas prices are subject to the vagaries of weather, fluctuations in home heating demand will occur against a backdrop of steadily rising gas demand for electric power generation as more and more US states and Canadian provinces turn their back on coal and its huge emission trail.

Within the financial sector, we are moving to a 1%-pt underweight in banks, and adding that weight to non-bank financials. While they will likely fare much better than their heavily exposed American counterparts, Canadian banks will feel a pinch from global credit market pressures in their international operations, and from tighter net

interest margins in Canada associated with higher wholesale funding costs. We were already overweight non-bank financials in light of insurers’ increasing participation in emerging markets overseas.

Gold on Track to Eclipse 1980 Peak

The gold group’s 9% advance helped power the materials group’s solid performance in October. We have augmented our overweight of that sector by another half-point this month, in line with our revised target of US$900/oz for late 2008, which would just surpass the metal’s 1980 record high. Gold historically has exhibited an inverse correlation of about 0.8 with the dollar. Further selling of the dollar should consequently lend support to gold prices, as the Fed eases again while other banks stand pat. As with oil, much of the world’s easy-to-produce gold has already been mined and larger, low cost ore bodies are becoming a rarity (Chart 7). Also worth noting is exploding wealth in areas of the world where there is a strong predilection for owning the metal like India and the Middle East. Mining shares have matched bullion’s gains recently, after lagging earlier. With global M&A volumes running at quintuple the level three years ago, when prices began their recent strong rally, an appetite for producing properties should help to make gold mining shares a good investment.

Table 5 - Fixed Income & Exchange Rate Projections

Chart 6 - Hot Global Market for Oil & Gas Properties

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Chart 7 - Large Gold Discoveries of Over 3 Million Ounces

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Year-End

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B of C Overnight Target (%) 4.50 4.50 4.50 4.50 4.25 4.50 4.50

2-Year GOC 4.16 4.25 4.25 4.40 4.03 4.25 4.50

10 Year GOC 4.31 4.40 4.35 4.40 4.09 4.40 4.80

30-Year GOC 4.38 4.45 4.55 4.60 4.14 4.45 4.90

S&P TSX Cdn Bond Index (% YTD total return) 1.7 3.0 0.5 1.6 4.0 3.0 3.1

Fed Funds 4.50 4.50 4.25 4.25 5.25 4.50 4.50

10-Year US Note 4.47 4.50 4.40 4.55 4.70 4.50 4.95

C$ in US cents 106.1 111.0 105.8 103.0 85.8 111.0 105.0

US$/EUR 1.45 1.50 1.45 1.42 1.17 1.50 1.40

Yen/US$ 115 113 114 115 119 113 110

Jun 30/08

Oct 31/07

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strategy

HISTORICAL PERFORMANCE: CIBC WM BENCHMARK AND ASSET CLASSES

(2) Market benchmark weight is the actual mix for stocks, bonds and cash held by the broad base of pension funds, segregated funds, mutual funds and insurance companies. This totals about $1 trillion of which pension and mutual funds are the biggest (45% & 37%) with life insurance and segregated funds at 11% & 7% respectively. The cash, stock and bond breakdown varies significantly among the 3 basic components such that the benchmark for any of the 4 categories may vary significantly from the published aggregate (eg. equities can vary from 10% for life companies to 75% for the other 3 categories). Data is Statistics Canada/Bank of Canada published data updated to current based on correlation analysis from the most recent partial actuals. The total return for the index will differ slightly from the summed weighted return for the sectors due to the weight shifts on a day-to-day basis.

(3) Equities by GICS sector benchmark weights are TSX data. Sector index levels are total returns.

All Asset Classes TSX Only

(1) Total return for the recommended portfolio is the index return multiplied by the individual asset mix or sector weight recommended by Economics & Strategy. Recommen ded portfolio weights for the current month appear in the front table.

PERFORMANCE OF STRATEGY PORTFOLIO VS BENCHMARK

* 2006 equity only return for strategy portfolio excludes income trusts

Asset Classes 2006 2007 YTD Last 3 Mos.Stocks (TSX Composite Total Return Index) 17.26 15.57 6.11Bonds (S&P TSX Cdn Bond Index) 4.00 1.69 2.27Cash (1-Month Bills) 3.88 3.43 1.01Market Benchmark(2) 11.64 9.37 4.29 -Strategy Portfolio 11.86 10.25 4.69TSX Stocks by Sector (Total Return) (3) 2006 2007 YTD Last 3 Mos.Consumer Discretionary 15.67 12.88 3.02Consumer Staples 5.53 4.50 -0.41Energy 6.06 11.08 2.85Financials 19.21 6.38 6.52 -Banks 19.84 3.26 5.00 -Insurance, REITS, others 17.50 10.49 4.24Health Care 0.69 -16.72 -4.42Industrials 14.66 17.83 -1.35Info Tech 27.33 51.20 28.47Materials 39.81 33.92 11.83 -Gold 28.03 8.65 20.24 -Other Metals 49.80 31.75 0.18Telecom 20.12 27.90 0.89Utilities 7.01 14.57 8.94*as of Oct 31/07

Total Return (%)*

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Strategy Portfolio TSX Composite(1)

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equIty researCh

TSX SECTORAL VIEWS BY FUNDAMENTAL EQUITY RESEARCH ANALYSTS FOR NOVEMBER 2007

Consumer Discretionary – B. Bek

The Canadian media space continues to see good overall performance through the first half of 2007. As expected, specialty TV continues to be strong as advertising dollars and subscription increases continued on their fast pace. Newspapers will likely continue to struggle, especially in Metro markets. Internet advertising remains a small piece of the overall advertising pie in Canada, but it is growing materially (Bek: Communications & Media – Market Weight).

Consumer Staples – P. Caicco, K. Wong, R. Piticco

We would continue to avoid the Canadian grocery stocks. Pricing is collapsing once more in Ontario. Supercenter and Superstore are hungry for volume and price declines are in motion. This will deepen sales erosion at other stores, and reduce the margin performance everywhere. Rising food inflation could also be a tough issue to deal with in a market where competitive pressure is mounting (Caicco: Merchandising & Consumer Products – Market Weight).

Energy – R. Plexman, M.Bridges, B.Borggard, W.Lee & J. Fetterly

With our moderate growth scenario intact, we believe that oil market fundamentals remain positive. Our analysis suggests that global oil demand growth will average 1.4 million Bbls/d over 2007–2010, handily outpacing non-OPEC supply growth over this period. In our view, rising oil demand, combined with limited spare production capacity, continued OPEC discipline, maturing infrastructure, and tight product markets, will drive global oil prices higher. Given strong cash flows and generally solid balance sheets, share buybacks are likely to continue. With attractive valuations, safe geographic location and competitive fiscal regime, M&A could be a further catalyst. Our focus is on oil producers, which have superior production growth prospects (Plexman: Oil & Gas – Overweight). Our long-term outlook for the junior/intermediate E&P sector remains favourable, but given that U.S. natural gas storage remains at record levels, we expect continued near-term weakness in the commodity could still drive potential buying opportunities within the group. An abnormally wet spring break-up contributed to soft Q2/07 volumes for many producers while ongoing natural gas price weakness and speculation about the sector’s ability to fund aggressive capital budgets in H2/07 continue to weigh on the sector (Bridges, Borggard and Lee: Oil & Gas Junior E&P – Market Weight).

Financials – D. Mihelic, R. O’Reilly, S. Boland

The recent turmoil in financial markets has created downside risk to bank earnings, while the banks’ extremely strong results year to date create difficult comps in F2008. We expect EPS growth to slow down significantly (Mihelic: Banks – Market Weight). Net redemptions for the industry were reported for the first time in several years. We believe this trend will be short lived. Wrap products continue to dominate industry flows, with net sales of $0.8 billion during August (Boland: Asset Managers – Market Weight). Canadian firms reported stronger-than-expected operating earnings growth in Q2/07. Pricing remains soft, but underwriting profits were stable. Higher yields negatively impact book value growth; however, this should be somewhat offset by higher investment income (Boland: P&C Insurers – Market Weight). In July and August MTD, REITs returned -3% on an unweighted basis, compared to a similar -3% total return for the S&P/TSX Composite Index. REITs’ returns have reflected the effect of a decline in the 10-year Government of Canada (GoC) bond yield of 15 basis points (bps) to 4.41%, which was more than offset by a 45 bp increase in the average REIT yield spread over the 10-year GoC bond. Takeover activity and fluctuating investor sentiment about further takeover bids have also been factors in REIT sector returns and prospects (O’Reilly: Real Estate – Market Weight).

Health Care – J. Walewicz

With close to 75% of the S&P/TSX Health Care Index driven by just three stocks, company-specific news should drive sector performance more than broader macro trends. We maintain our Market Weight sector weighting, as we view the risk/reward profile for the dominant Canadian health care stocks as balanced. The diversity of the Canadian health care space demands that investors continue to focus on stock selection (Walewicz: Health Care – Market Weight).

Industrials – M. Willemse, J. Bout

We are encouraged by strong production levels for Q3/2007, and do not anticipate any surprise production cuts. We believe investor sentiment has improved, as production levels appear to be favourable, inventory levels have declined, and GM seem to have made progress with their turnarounds (Willemse: Automotive – Market Weight). Steel market fundamentals have improved significantly since the end of 2006. U.S. service centre inventories declined significantly in H1/2007 due to a seasonal increase in demand, reduced import activity and lower domestic production levels. Given current inventories and import trends, steel producers should continue to have significant pricing power throughout mid-2007 (Willemse: Steel – Market Weight). Market Weight rating on the capital equipment sector reflects the complexity of the group’s underlying

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equIty researCh

TSX SECTORAL VIEWS BY FUNDAMENTAL EQUITY RESEARCH ANALYSTS FOR NOVEMBER 2007

drivers. While we believe there is likely to be ongoing softness in US commercial/residential construction, robust economic growth in Asia should continue to drive demand for commodities. A moderating global economy should help ease the current frantic demand for new heavy equipment, providing more manageable growth and improved margins. The capital equipment sector is typically a late-cycle performer (Bout: Capital Equipment – Market Weight). Our Market Weight rating on the Canadian rails reflects the mixed outlook for the global economy (more buoyant for international markets and muted for North America). As the transporter of all things commercial, residential and industrial, historically, the Canadian rails’ performance has mirrored economic conditions. However, given the sector-specific issues facing the trucking industry (highway congestion, higher fuel costs for trucks versus rails, and increased regulation for trucks), we expect the Canadian rails to capture a disproportionate amount of the freight volume growth (at the expense of trucks) and, with an improved level of service, generate revenue growth higher than GDP (Bout: Railroads – Market Weight).

Information Technology – P. Lechem, T. Coupland

Software spending has settled into a more predictable pattern, with market research expecting sector growth in the mid-to-high single digits. The sector has also settled into a relatively predictable seasonal pattern, with summer typically a slow period for software sales, but sales rallying in the fall, driven by budgetary considerations (ie. customers making purchases prior to year-end). Over the past decade, technology stock prices have tended to follow a similar pattern, selling off in the slow summer period before rallying to year-end strength. We believe the sector is currently attractively valued and we see technology stock valuations and timing as both offering an attractive entry point. (Lechem: Technology-Software – Market Weight). The common themes among Business and Professional Services are: (1) transaction-based / contract-based revenues (often long-term, or repeatable); (2) profitability depends largely on project management to deliver high utilization rates; (3) the core business model is leveragable across clients and geographies; and, (4) customers are increasingly looking for a range of solutions from their service providers. These trends are driving both company diversification and industry consolidation (Lechem: Business and Professional Services – Market Weight). Although our coverage universe is quite diversified, the hardware sector has started to benefit from growth in certain emerging markets and resurgence in capital spending in networking. We expect this to continue as developing regions look for high-quality and lower-price solutions for communication networks and infrastructure. Key emerging themes: 1) the deployment of WiMAX and other wireless networks; 2) hardware and software to support the rollout of the triple and quadruple play in the telecommunications market; and 3) solutions for dealing with network congestion (Coupland: Technology Hardware – Market Weight).

Materials – J. Bout, H. Carreau, B. Cooper, D. Roberts, C. Hale-Sanders, B. Humphrey

Gold prices, year-to-date, have averaged US$660/oz. We forecast gold prices to average US$675/oz. in 2007 and US$725/oz. in 2008. The factors that brought us from the sub-US$300/oz. level a few years ago have not abated and, arguably, are as strong today as they have been at any time. Longer-term fundamentals remain in place for gold to move upward driven by a scarcity of deposits and strong physical and investment demand. We continue to recommend an Overweight stance on the sector with an expectation that smaller-cap stocks will offer the best returns (Cooper, Humphrey: Mining, Precious Metals – Overweight). Over the past month, concerns of a slowing global economy in 2007 and 2008 caused by the perceived ongoing “credit crunch” in the capital markets resulted in a significant correction in base metals equity and commodity prices. While the demand outlook is somewhat cloudy given the ongoing capital market gyrations, unless physical demand actually comes under pressure we do not believe this capital markets turmoil marks the end of the secular bull market for base metals (Hale-Sanders: Mining, Metals and Minerals – Market Weight). 2007 has been a frantic year for the fertilizer industry with 92.9 million acres of corn having been planted. Black Sea urea prices have rebounded on expectations of Indian and Brazilian demand. Potash market remains tight (Bout: Chemicals & Fertilizers – Market Weight). We think most pulp, paper and packaging prices are close to their cyclical peaks. To the extent that prices remain relatively high, it will be due more to “cost push” than “demand pull” forces – not a very exciting prospect. We also caution investors against searching for a “favourite” grade of paper. We think building materials prices will hover around cash costs through at least mid-2008 until excess inventories in the U.S. housing market are depleted. A recovery is expected sooner for lumber than panels due to the increasing supply of the latter (Carreau, Roberts: Paper & Forest Products – Underweight).

Utilities – M. Akman, A. Pavao

Pipeline and utility stocks have fallen since mid-July, in sympathy with the broader market sell-off. While market turbulence may continue in the near-future and influence the movement of stocks in our universe, the fundamental growth drivers for Canadian pipelines & utilities remain strong. Commodity prices remain above historical levels, which continue to be a positive factor for the pipeline, utility and power stocks. A growing electricity supply shortage, especially in Alberta, should continue supporting higher power prices and investment opportunities (Akman, Pavao: Pipeline & Utilities – Market Weight).

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QUANTITATIVE TACTICAL ASSET ALLOCATION (QTAA) STRATEGY — by Yin Luo

The equity market was up in October, outperforming both bonds and cash. The best performing sector, information technology, was up more than 14%, while the industrials sector was down 1.5% in the month. Crude oil, gold, and other commodities were up. The Canadian dollar was up substantially in October.

Our QTAA strategy uses a statistical technique called logit model to make asset allocation decisions. Our QTAA model (see Exhibit 1) is suggesting stocks as the best asset class for November, outperforming both bonds (probability = 51%) and cash (probability = 79%).

We recommend overweighting stocks and underweighting cash. After two months of turbulent time in July and August, the market volatility further stabilized in October (see Exhibit 2).

Note: From a modeling perspective, we use the S&P/TSX Equity Index as our main benchmark and treat income trusts as a separate

component in our TAA and sector rotation strategy.

QUANTITATIVE SECTOR ROTATION STRATEGY

Compared to the recent average, our quant model assigns more weight to quality and growth factors and reduces weight on value and analyst revision factors for November 2007.

Our QED model suggests overweighting the energy, industrials, and financials sectors. We also recommend underweighting the health care, telecom services, and materials sectors. For stock-specific analysis, please refer to our QED Model Monthly Forecast, November 1, 2007 for individual stock rankings.

Exhibit 3 provides our QED model ranking for the 10 GICS sectors, using the bottom-up approach on a capitalization-weighted basis. Exhibit 4 decomposes the QED score for each sector by the six sources of alpha: value, growth, momentum, analyst revisions, quality, and market.

The suggested overweight on the energy sector is driven mainly by quality, growth, stock momentum and sector alpha. We also recommend overweighting the industrials sector, due to attractive valuation, quality, and sector momentum. The financials sector is also at overweight, because we believe the large-cap, high liquidity, and low beta nature of the sector will be rewarded.

We recommend underweighting the health care sector, mostly due to the negative sector alpha. The underweight stance on the materials sector is based on the negative quality and market exposure. We also suggest underweighting the telecom services sector on valuation.

Within the income trust universe, we still prefer business and power & pipeline trusts, and suggest underweighting oil & gas trusts. Momentum and revision style factors are the driving forces behind our current trust recommendation (see Exhibit 5).

Source: CIBC World Markets Quantitative Strategy

Exhibit 1. Macro Factor Contribution — QTAA

Stocks/ Stocks/ Bonds/Factor Cash* Bonds* Cash*

Yield spread 2 NA 2Equity Yield Gap NA 2 NAU.S. Equity Yield Ratio 5 NA NATSX Dividend Yield 2 2 NAChange in 3-Month T-Bill Yield NA 3 NATSX GARCH Volatility 3 3 NAChange in TSX GARCH Volatility 5 NA NAOil Price 2 2 2CRB Commodity Index NA 5 NACanadian Dollar 5 NA 5Put-Call Ratio 3 3 3Leading Economic Indicator NA 3 NAM3 Money Supply NA 1 1ISM Index 3 NA NAProbability of Outperformance 79% 51% 53%* 5 indicates the strongest positive contribution to outperformance, while 1 means the strongest contribution to underperformance.Source: CIBC World Markets Quantitative Strategy

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Exhibit 2. Market Volatility

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quantItatIve strategy

Exhibit 3. TSX Common Equity Sector/Size QED RankingQED Model Methodology

This section provides a brief overview of our QED model methodology. For a more in-depth discussion on model methodology and back tests, please refer to Quantitative Strategy – Quantitative Equity Dynamic (QED) Model: An Introduction, dated August 3, 2005.

In essence, the QED model is a multivariate model, based on panel data economics, to forecast stock returns (or alpha).

The QED model is first estimated on 27 alpha factors from six categories (value, growth, momentum, analyst revisions, quality, and market). We strive to find factors that are not highly correlated, have high “T” statistics, are jointly statistically significant, and more importantly, provide excellent out-of-sample forecasting ability.

We then use macroeconomic variables to build a dynamic time series model to forecast the factor returns (or returns from a unit exposure to the various alpha factors). The weightings in the QED model are dynamically adjusted based on the economic and market environment. Two other methods, simple moving average and exponentially weighted moving average, are also used to predict factor returns.

The QED model is rigorously back-tested with true out-of-sample portfolio simulations. Based on monthly rebalancing, the annualized spread between the top decile and the bottom decile is about 66% before transaction costs, and positive over 85% of time.

The real power of our QED model is, however, on stock selections. Please refer to our monthly Quantitative Strategy Outlook or weekly QED Model Forecast for details.

Source: CIBC World Markets Quantitative Analysis

Market Cap Wgt in TSX QED Rating RelativeSector/Size QED Ranking # of Stocks ($Mlns) Comp (%)* (10=Best) Rating**

Energy 42 332,946.50 23.7 8.6 1.14Materials 50 236,522.60 16.8 5.4 0.72Industrials 15 76,023.80 5.4 8.6 1.14Consumer Discretionary 22 63,979.70 4.5 6.0 0.80Consumer Staples 12 39,372.10 2.8 6.5 0.87Health Care 6 7,530.60 0.5 4.1 0.54Financials 27 435,994.50 31.0 8.4 1.11Information Technology 9 74,327.10 5.3 8.0 1.07Telecommunication Services 3 47,885.20 3.4 4.4 0.58Utilities 5 19,339.80 1.4 7.3 0.96Total TSX Composite 191 1,333,921.70 95.0 7.5 1.00

TSX 60 53 1,047,982.40 74.6 7.7 1.02TSX Completion 138 285,939.30 20.3 6.9 0.91Non-TSX Composite 215 58,838.30 NA 5.1 0.68TSX SmallCap 126 81,704.50 4.0 5.4 0.71Total Universe 406 1,392,760.10 NA 7.4 0.99

* The sum of all sector weights may not equal to 100%, because we exclude companies in the process of being taken over.** A relative QED rating above one indicates buying/overweighting signal. Sector relative ratings are relative to the TSX Composite Index, while the size relative ratings are relative to the whole universe.Source: Bloomberg, CompuStat, CPMS, IBES, S&P, TSX, CIBC World Markets Quantitative Strategy

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Exhibit 5. QED Income Trust RankingMarket Cap Wgt in Trust QED Rating Relative

Income Trust Sector/Industry Group QED Ranking # of Trusts ($Mlns) Universe (%)* (10=Best) Rating**

Energy 46 81,619.10 54.8 2.2 0.77Materials 9 7,881.90 5.3 4.3 1.48Industrials 14 6,887.50 4.6 4.2 1.42Consumer Discretionary 12 14,873.30 10.0 4.2 1.45Consumer Staples 5 1,644.50 1.1 3.2 1.11Health Care 2 1,626.90 1.1 5.0 1.71Financials 19 23,233.10 15.6 3.0 1.02Information Technology 1 1,452.00 1.0 4.0 1.37Telecommunication Services 1 4,018.90 2.7 4.0 1.37Utilities 8 5,687.50 3.8 3.8 1.30

Business 47 40,462.20 27.2 4.2 1.45Oil & Gas 37 71,629.20 48.1 1.9 0.66Power & Pipeline 17 15,677.40 10.5 4.2 1.44REIT 16 21,155.90 14.2 2.8 0.95Total Trust Universe 117 148,924.70 0.0 2.9 1.00

** A relative QED rating above one indicates buying/overweighting signal. All sectors and groups are relative to the CIBC WM Quant income trust universe.Source: CIBC World Markets Quantitative Strategy

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Analyst Certification: Each analyst of CIBC World Markets whose name appears on the front page of this research report hereby certifies that (i) the recommendations and opinions expressed in the research report accurately reflect the research analyst’s personal views about any and all of the securities or issuers discussed herein that are within such analyst’s coverage universe and (ii) no part of the research analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst in the research report.

Conflicts of Interest: CIBC World Markets’ equity research analysts are compensated from revenues generated by various CIBC World Markets businesses, including CIBC World Markets’ Investment Banking Department. CIBC World Markets had, has or may aspire to have an investment banking, merchant banking, lending or other credit relationship with the company that is the subject of this report and may have received compensation from the subject company in connection with transac-tions that have not been publicly disclosed. CIBC World Markets or its shareholders, directors, officers and/or employees, may have a long or short position or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. The reader should assume that CIBC World Markets may have a conflict of inter-est and should not rely solely on this report in evaluating whether or not to buy or sell the securities of the subject company. Information regarding CIBC World Markets Inc.’s rating system and its policies and procedures regarding the dissemination of research is available at cibcwm.com or by contacting one of our client advisers in your jurisdiction.

Legal Matters: This report is issued and approved for distribution by (i) in Canada by CIBC World Markets Inc., a member of the IDA and CIPF, (ii) in the UK, CIBC World Markets plc, which is regulated by the FSA, and (iii) in Australia, CIBC World Markets Australia Limited, a member of the Australian Stock Exchange and regulated by the ASIC (collectively, “CIBC World Markets”). This report has not been reviewed or approved by CIBC World Markets Corp., a member of the NYSE and SIPC, and is intended for distribution in the United States only to Major Institutional Investors (as such term is defined in SEC Rule 15a-6 and Section 15 of the Securities Act of 1934, as amended). This document and any of the products and information contained herein are not intended for the use of private investors in the UK. Such investors will not be able to enter into agreements or purchase products mentioned herein from CIBC World Markets plc. The comments and views expressed in this document are meant for the general interests of clients of CIBC World Markets Australia Limited. This report is provided for informational purposes only, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. The securities mentioned in this report may not be suitable for all types of investors; their prices, value and/or income they produce may fluctuate and/or be adversely affected by exchange rates. This report does not take into account the investment objectives, financial situation or specific needs of any particular client of CIBC World Markets. Before making an investment decision on the basis of any recommendation made in this report, the recipient should consider whether such recommendation is appropriate given the recipient’s particular investment needs, objectives and financial circumstances. CIBC World Markets suggests that, prior to acting on any of the recommendations herein, you contact one of our client advisers in your jurisdiction to discuss your particular circumstances. Since the levels and bases of taxation can change, any reference in this report to the impact of taxation should not be con-strued as offering tax advice; as with any transaction having potential tax implications, clients should consult with their own tax advisors. Past performance is not a guarantee of future results. The information and any statistical data contained herein were obtained from sources that we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. All estimates, opinions and recommendations expressed herein constitute judge-ments as of the date of this report and are subject to change without notice. Although each company issuing this report is a wholly owned subsidiary of Canadian Imperial Bank of Commerce (“CIBC”), each is solely responsible for its contractual obligations and commitments, and any securities products offered or recommended to or purchased or sold in any client accounts (i) will not be insured by the Federal Deposit Insurance Corporation (“FDIC”), the Canada Deposit Insurance Cor-poration or other similar deposit insurance, (ii) will not be deposits or other obligations of CIBC, (iii) will not be endorsed or guaranteed by CIBC, and (iv) will be subject to investment risks, including possible loss of the principal invested. The CIBC trademark is used under license.

© 2007 CIBC World Markets Inc. All rights reserved. Unauthorized use, distribution, duplication or disclosure without the prior written permission of CIBC World Markets is prohibited by law and may result in prosecution.

Legal Disclaimers and Important Disclosure Footnotes

*“We have compiled our analysts’ views in accordance with the TSX sectoral breakdowns. We would note however that an analyst’s coverage universe might not correspond exactly with the constituents of the TSX sectors noted above. As such, we refer readers to CIBC World Markets “Monthly Canadian Research Review and Common Stock Universe” publication where each analysts’ specific universe is broken out. Analyst weightings are based solely on the specific constituents of that analyst’s universe and might not correspond with the constituent in the TSX sector breakdowns.”

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